Europe moves to tax software downloads

The price of software downloaded from the US or other non-European Union countries could rise if new European Commission (EC) proposals become law.

EC ministers are moving to close a tax loophole that meant non-EU firms could offer VAT-free internet downloads as the net wasn't covered by existing law and they didn't have to pay the tax themselves.

Once the proposals have been made law, any non-EU firm generating more than a total of 100,000 euros (£63,350) in electronic sales in EU member states will have to register for VAT in an EU state. The country most likely to benefit is Luxembourg because it has the lowest VAT rate - -15 per cent. Others charge as much as 25 per cent.

The EC says it has drawn up the proposals to introduce a level playing field for European firms, which currently have to pay VAT regardless of where the services are delivered. After the changes come into law, electronically delivered services for consumption within the EU will be subject to VAT, while those for consumption outside the EU will not be subject to VAT.

All member states and the European Parliament must now approve the changes before they can be implemented, and this is unlikely to occur before the end of the year.

Frits Bolkestein, EC taxation commissioner, said: "These amendments would facilitate electronic commerce by giving business security and certainty as to its obligations under the EU VAT system.

"By modernising the VAT system to address the electronic delivery of services, we will ensure that all stakeholders are able to participate on a fair and equitable basis in the development of the information society."

It might not be that simple, however. Analysts point out that downloads from US websites do not usually have an agreement in place to say which country tax is payable in, and that proving downloads have actually taken place is difficult.

Moreover, leading US politicians and business figures have already voiced their opposition to the changes. The EU may have real difficulty enforcing its proposals if non-EU firms refuse to go ahead and register for VAT in one of the member states. This is because, in effect, until such firms do register for VAT in an EU-member country, European courts have no direct jurisdiction over them.